Debates about benefit structures often focus on the trade-off between higher benefits and increased utilization. Yet little empirical information is readily available to policymakers about how to make this trade-off.

To help policymakers address this question, WCRI undertook a survey of the economics literature. This literature is extensive and diverse: We reviewed over 150 studies, most published in scholarly professional journals. Few of these studies specifically examine workers’ compensation; most focus on workers’ decisions in analogous situations—among them, unemployment insurance, social security disability insurance, and Aid to Families with Dependent Children. Together these studies provide reasonably consistent findings about workers’ decisions to file claims and return to work. Our non-technical summary gives policymakers access to their important lessons.

The studies yield a simple rule of thumb: On average, a 10 percent increase in benefits increases utilization by 5 percent. Studies of workers’ compensation find that a 10 percent increase in benefits raises the duration of temporary total disability by 2 percent and the number of claims by 3 percent. This rule of thumb is a necessary simplification. The studies provide a range of estimates that are best characterized by the rule. Note that these are averages across all recipients. Some groups of workers—among them married women, lower-income workers, and older workers—tend to be more sensitive to economic incentives than are others.

Using the rule of thumb, one would expect a 10 percent increase in benefits to increase aggregate payments by at least 15 percent. This reflects the direct effect of the 10 percent increase and the indirect effect of increased utilization (5 percent).

Drawing on examples from California, Texas, and other states, the report illustrates how to analyze the effects of lowering or raising maximum and minimum benefits.

The report concludes with a discussion of research needs in the area of return-to-work incentives. The most critical need centers on return-to-work decisions at realistic alternative benefit levels. Also important is the special responsiveness of certain groups of workers to economic incentives. Our findings here come from non-workers’ compensation programs; we need studies to clarify the generalizability of these findings to workers’ compensation systems.

Return to Work Incentives: Lessons for Policymakers from Economic Studies. Dr. John A. Gardner. June 1989. WC–89–2.

Copyright: WCRI